Markets Grind Higher, Approach Record Levels

For the week ending 10 May 2024

As of midday Friday, global equities rose sharply on the week, approaching record levels amid signs of an upswing in growth in Europe along with downshifting growth in the United State that has reduced the odds of overheating. Ahead of next week’s release of pivotal US inflation data, the yield on the US 10-year Treasury note was little changed at 4.49%. The price of a barrel of West Texas Intermediate crude oil rose a dollar to $79.95. Volatility, as measured by the Cboe Volatility Index (VIX), continued to sink, falling to 12.8 from 13.8 last Friday. 

MACRO NEWS

US, Israel at odds over Rafah

US President Joe Biden said Wednesday that the US would block the delivery of weapons that could be used by Israel against Hamas fighters in densely populated Rafah, the city in southern Gaza where more than a million Palestinians are thought to be sheltering. On Thursday, Israeli Prime Minister Benjamin Netanyahu said that if it must, Israel will proceed without US assistance. Tens of thousands of people have fled Rafah since Monday, when Israel called for the evacuation of part of the city. Israeli officials believe that Hamas can’t be defeated without conducting operations in Rafah, operations that US officials see as counterproductive.

Bank of England sets stage for rate cuts

The Bank of England held rates steady at 5.25% at its Thursday meeting but set the stage for cuts potentially as early as next month. Governor Andrew Bailey said it is “likely we will need to cut the bank rate” and that rates may fall more sharply than markets expect. BOE Chief Economist Hew Pill added later Thursday that the bank is seeing encouraging signs on both inflation and growth. His optimism on growth was borne out on Friday when the United Kingdom reported Q1 growth of 0.6% from the prior quarter, beating forecasts of a 0.4% rise.

BOJ’s Ueda reverses course on yen impact

Having set off a wave of yen-selling last week after opining that yen weakness was unlikely to impact inflation or monetary policy, Bank of Japan Governor Kazuo Ueda backtracked this week, saying it would be right to raise rates faster if upside price risks grow, adding that the one-sided weakness of the yen is a negative for Japan’s economy. He said the BOJ will carefully monitor the currency’s weakness as it assesses the need to adjust monetary policy. After the comments, markets fully priced in a 0.10% rate hike at the July BOJ meeting, though the yen continued to weaken. 

QUICK HITS

According to the Wall Street Journal, The White House is expected to announce next week that it will quadruple tariffs on Chinese electric vehicles, solar components and batteries.

The Bank of Canada released its annual Financial Stability Report on Thursday. The report showed that equity and corporate bond valuations are stretched. The central bank said it is watching commercial real estate risks but noted that the exposure of the largest Canadian entities is limited and that banks are positioned to absorb potential losses. The BoC found that households can services their debts at higher interest rates but said renters are more financially stressed than mortgage holders.

Investor confidence rose in the eurozone for the sixth straight month, according to the Sentix survey. The May reading rose to -3.6 from -5.9 in April.

Seeking to strengthen ties between China and the European Union, Chinese President Xi Jinping visited France, Serbia and Hungary this week. Relations between China and Europe have been strained by China’s alliance with Russia.

What with elevated prices, high mortgage rates and difficulty saving money for a down payment, only about four in 10 renters think they will be able to buy a home, according to a survey released by the Federal Reserve Bank of New York on Monday. That’s the lowest level since the survey on the housing-related experiences and expectations of consumers was started a decade ago.

Led by the service component, the J.P. Morgan global composite purchasing managers’ index rose 0.1 to 52.4 in April.

Eurozone retail sales rose 0.8% in March from the month before after dropping an upwardly revised 0.3% in February.

The US Federal Reserve’s quarterly Senior Loan Officers Opinion Survey showed that terms on commercial and industrial loans, commercial real estate loans and residential mortgages all tightened, but at a slower pace than in the previous quarter. Demand across all categories weakened slightly.

The Reserve Bank of Australia left its cash rate unchanged at 4.35% but expressed inflation concerns. Governor Michele Bullock was decidedly hawkish during the post-meeting press conference, suggesting that the RBA is prepared to raise rates again if necessary.

The Organization for Economic Cooperation and Development, the International Monetary Fund and the World Trade Organization are forecasting a sharp rebound in global trade flows this year after the 2023 slowdown driven by higher prices, surging interest rates and sluggish demand. According to the OECD, global trade in goods and services is expected to rise 2.3% this year and 3.3% in 2025. This compares with growth of just 1% last year.

New York Fed President and FOMC Vice Chair John Williams, among the three most influential Fed officials, said Monday that “eventually, we'll have rate cuts.” He added that monetary policy was now in in a very good place.

The US this week revoked export licenses that allowed US chipmakers to supply Huawei, a leading Chinese communications technology provider, with semiconductors, increasing tensions between Beijing and Washington.

According to Deutsche Bank, US companies have announced $383 billion in stock buybacks in the past quarter, up 30% from the same period last year, suggesting companies are upbeat on the economic outlook.

Fed Governor Lisa Cook said banks’ exposure to commercial real estate risks are sizable but manageable and that the Fed has boosted the supervision of banks with large CRE exposures.

EU countries have agreed to use an estimated €3 billion in profits stemming from Russia’s frozen state assets to jointly buy weapons for Ukraine. The deal struck on Wednesday targets profits made by Belgium’s central securities depository Euroclear, by whom about €190 billion of Russian central bank assets are held. In 2022, Western nations froze Russia’s state assets held abroad in response to its invasion of Ukraine.

In an effort to boost its economy, China is offering consumers and businesses financial incentives to trade in old cars, aging home appliances and outdated factory equipment. Wall Street analysts estimate the program could lift economic growth by around 0.6%.

After weeks of rarely straying from readings near 212,000 a week, first time claims for US unemployment benefits jumped to 231,000 in the week ended 4 May. Bond yields ticked lower after the data.

Canada added 90,400 new jobs in April, the most in 15 months, beating expectations for a 20,000 gain by a wide margin. The country’s unemployment rate held steady at 6.1%. After the data were released, the odds of a rate cut from the Bank of Canada as soon as June declined to less than 50%.  

EARNINGS NEWS

With about 92% of the constituents of the S&P 500 Index having reported for Q1 2024, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings slightly rose around 5.49% compared with the same quarter a year ago, according to data from FactSet. Sales growth is up 4.1% year over year. Markets are eagerly awaiting Nvidia’s earnings report, which is not due until Wednesday 22 May.